Judge Randolph M. Hammock, Case 18STCV09674 2022-11-21 Tentative Ruling

Plaintiff ReactX, LLC alleges that Defendant Google, LLC misappropriated and/or misused ReactX’s intellectual property in the development of Google’s ReactX’s Confidential Information, its Platform, and/or its proprietary source code in a variety of Google products and platforms, including but not limited to, AdSense “Auto Ads”; Google Ad Manager; Google Ad Exchange; Google Ads; and DV360, all without compensation to ReactX.

Pursuant to Defendant’s request, the court takes judicial notice of Exhibits A through N. The court takes judicial notice of the exhibits without assuming the truth of the assertions contained therein. (See Seelig v. Infinity Broad. Corp. (2002) 97 Cal. App. 4th 798, 808.)

A demurrer for sufficiency tests whether the complaint states a cause of action. (Hahn v. Mirda (2007) 147 Cal. App. 4th 740, 747.) When considering demurrers, courts read the allegations liberally and in context. (Taylor v. City of Los Angeles Dept. of Water and Power (2006) 144 Cal. App. 4th 1216, 1228.) In a demurrer proceeding, the defects must be apparent on the face of the pleading or by proper judicial notice. (CCP § 430.30(a).) A demurrer tests the pleadings alone and not the evidence or other extrinsic matters. (SKF Farms v. Superior Court (1984) 153 Cal. App. 3d 902, 905.) Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed. (Id.) The only issue involved in a demurrer hearing is whether the complaint, as it stands, unconnected with extraneous matters, states a cause of action. (Hahn, 147 Cal.App.4th at 747.)

Defendant Google demurrers to the second cause of action in the SAC for breach of the implied covenant of good faith and fair dealing. Under California law, the elements to establish a breach of the implied covenant of good faith and fair dealing claim are: (1) the parties entered into a contract; (2) the plaintiff performed all, or substantially all, of the obligations under the contract; (3) that any conditions precedent to the defendant’s performance occurred or were excused; (4) that defendant’s conduct prevented plaintiff from receiving the benefits under the contract; (5) that by doing so, defendant did not act fairly and in good faith; and (6) that plaintiff was harmed by defendant’s conduct. (See CACI No. 325.)

A cause of action for breach of the covenant of good faith and fair dealing "must show that the conduct of the defendant, whether or not it also constitutes a breach of a consensual contract term, demonstrates a failure or refusal to discharge contractual responsibilities, prompted not by an honest mistake, bad judgment or negligence but rather by a conscious and deliberate act, which unfairly frustrates the agreed common purposes and disappoints the reasonable expectations of the other party thereby depriving that party of the benefits of the agreement." (Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1394.) Whether certain conduct meets this criterion must be determined on a case by case basis and will depend on the contractual purposes and reasonably justified expectations. (Id.)

Defendant first argues the claim fails because the parties’ agreements expressly permitted Google to terminate the licensing relationship. Google contends that the parties’ license agreement had an express two-year term. At the conclusion of the term, the parties’ relationship would expire. (See RJN Ex. A., p. 9 [“[t]he term of this Agreement shall commence on the Effective Date and shall continue for two years.”].) Thus, it is Google’s position that any “deprecation” was expressly permitted by the agreement. “Google had every right to walk away from the parties’ relationship…after the license expired.” (Opp. 13: 22.) Google maintains that any acts it took were wholly consistent with the contract, or merely demonstrate “steps to wind down the relationship” toward the end of the two-year contractual term. (Reply 5: 11-12.)

In opposition, Plaintiff argues that the implied covenant claim “is not based upon the termination of the License and Terms,” but rather, Google’s “actions that unfairly interfered with ReactX’s rights to receive the benefits” of the license and terms. (Opp. 7: 21-24.) These actions included “deprecating the ReactX technology from Google’s digital advertising exchange platforms”; “secretly developing its own programmatic high impact formats and rich media technology”; and “diverting ReactX’s customers away from ReactX to Google’s products.” (SAC ¶¶ 87, 107.) Accordingly, the allegations “are not dependent upon any termination of the contracts,” and allege “independently actionable conduct.” (Opp. 13: 23-26.)

ReactX alleges that it and Google entered into two written contracts—the “License” and the “Terms”—each of which came with an implied covenant of good faith and fair dealing. (SAC ¶ 106.) Plaintiff alleges that after Google decided to “deprecate” ReactX, “Google intentionally diverted ReactX’s customers away.” (SAC 96.) Moreover, “during the License period when ReactX was devoting its time, resources, know how, and expertise to building a successful partnership with Google and training Google’s engineering and sales teams, Google was secretly developing its own programmatic high impact formats and rich media technology, including but not limited to, Google’s Projects HiFi, Botox, and Localhost.” (SAC 87.) Thus, ReactX contends that Google breached the implied covenant “by engaging in actions that unfairly interfered with ReactX’s rights to receive the benefits” of the contracts, “including but not limited to, deprecating the ReactX technology from Google’s digital advertising exchange platforms and diverting ReactX’s customers away from ReactX to Google’s products, so that ReactX could not receive the financial benefits of the contracts that ReactX was entitled to.” (Id., ¶ 107.)

Here, Google takes too narrow a view of the SAC—the court does not read the SAC as being based solely on Google’s decision to terminate the relationship. As plead, Google’s decision to deprecate ReactX’s technology, “secretly” develop its own programmatic high impact formats, and divert its customers could constitute a breach independent of any contractual right to terminate. Put differently, there is nothing to suggest that Google could not both invalidly divert customers or deprecate ReactX’s technology, while also validly exercising its right to terminate when that time came. Of course, it is reasonable that Google took steps to “wind down the relationship” toward the end of the term. But the issue will likely involve a critical question of timing: when did Google supposedly “deprecate[] the ReactX technology” or “divert[] ReactX’s customers away.” (SAC 107.) (See Hicks v. E.T. Legg & Associates (2001) 89 Cal.App.4th 496, 509 [whether implied covenant has been breached “is ordinarily ‘a question of fact unless only one inference [can] be drawn from the evidence’ ”].) The court cannot resolve that issue now.

Google next argues that ReactX’s theory that Google diverted customers is duplicative of the breach of contract cause of action. Google contends the implied covenant claim “relies on the same alleged conduct that underlies” the breach of contract claim, particularly “Google’s alleged misuse of ReactX’s proprietary information to develop a competing product and divert ReactX’s customers to that product.” (Dem. 15: 13-17.) “If the allegations do not go beyond the statement of a mere contract breach and, relying on the same alleged acts, simply seek the same damages or other relief already claimed in a companion contract cause of action, they may be disregarded as superfluous as no additional claim is actually stated.” (Careau & Co. v. Sec. Pac. Bus. Credit, Inc. (1990) 222 Cal. App. 3d 1371, 1395.)

Plaintiff contends, in opposition, that the implied covenant claim “supplements[,] but does not duplicate[,] the breach of contracts claim.” (Opp. 16: 2-3.) In support, Plaintiff notes the SAC’s breach of contracts claim is based upon Google’s breaches of the express provisions of the License and Terms prohibiting Google from using ReactX’s Intellectual Property to develop or create similar products. (SAC ¶¶ 99-104.) In contrast, the SAC’s Implied Covenant claim is based upon Google’s “actions that unfairly interfered with ReactX’s rights to receive the benefits of these contracts, including but not limited to, deprecating the ReactX technology from Google’s digital advertising exchange platforms and diverting ReactX’s customers away from ReactX to Google’s products…” (Id. ¶¶ 106-08.)

What ultimately constitutes a breach is, as noted, largely a question of fact. Viewing the allegations in the light most favorable to Plaintiff, the SAC alleges facts that could rise beyond the mere contract breach. [FN 1] Thus, at least for pleadings purposes, Plaintiff has adequately alleged a claim for breach of the implied covenant that is not, as a matter of law, duplicative per se of the breach of contract claim.

Finally, Google argues that if the claim is not duplicative of the breach of contract claim, then it sounds in tort and is therefore preempted by CUTSA. “At least as to common law trade secret misappropriation claims, ‘UTSA occupies the field in California.’” (K.C. Multimedia, Inc. v. Bank of Am. Tech. & Operations, Inc. (2009) 171 Cal. App. 4th 939, 954 [citing AccuImage Diagnostics Corp v. Terarecon, Inc., at p. 954].)

Here, as explained above, the court does not find that ReactX’s Implied Covenant claim, at least as plead, is duplicative of its breach of contracts claim. The court also does not and need not find that the cause of action sounds in tort. Rather, the claim “seeks contractual remedies based upon Google’s breaches of the implied covenant that is imposed in every contract.” (Opp. 21: 3-6.) The court also notes that Google’s only authority suggesting preemption are two federal district court cases not binding on this court.

Finally, to the extent that Google contends the allegations that Google diverted ReactX customers are identical to the allegations in the claim for intentional interference with contract—a claim the court did find preempted by CUTSA when ruling on a demurrer to the FAC—that ruling has no impact on this conclusion. Even assuming the allegations are nearly identical, a demurrer “does not lie as to a portion of a cause of action and if any part of a cause of action is properly pleaded, the demurrer will be overruled.” (Fire Ins. Exchange v. Superior Court (2004) 116 Cal.App.4th 446, 452.) The second cause of action is based on conduct aside from, or in addition to, the allegation that Google allegedly diverted customers from ReactX.

A motion to strike lies either (1) to strike any irrelevant, false or improper matter inserted in any pleading; or (2) to strike any pleading or part thereof not drawn or filed in conformity with the laws of this state, a court rule or order of court. (CCP § 436.) Courts are given “broad discretion” when ruling on a motion to strike. (Camenisch v. Superior Court (1996) 44 Cal.App.4th 1689, 1699).

Google moves to strike the following three portions of the SAC: (1) The entirety of paragraphs 96–97, 105–108; or (2) the portion of SAC paragraph 107 found at 35:23–24, which reads “deprecating the ReactX technology from Google’s digital advertising exchange platforms and”; or (3) the portion of SAC paragraph 107 found at 35:24–25, which reads “and diverting ReactX’s customers away from ReactX to Google’s products.”

First, Google argues that it was “contractually entitled to end its relationship with ReactX,” and that this “termination” theory of liability should be stricken. (Mtn. 14: 20-22.) AS noted above, the court need not and does not construe the SAC as being based solely on Google’s decision to terminate the relationship—indeed, ReactX reasonably claims that it’s not based on this factor at all. Indeed, the SAC alleges conduct independent of the decision to terminate that could support breach of the implied covenant.

Second, Google contends that the implied covenant claim is duplicative of the breach of contract claim. The court again does not find as a matter of law at the pleading stage that the claims are duplicative. As plead, the breach of contract claim is based, at least in part, upon Google’s breaches of the express provisions of the License and Terms. The Implied Covenant claim, on the other hand, is based in part upon Google deprecating the ReactX technology from Google’s digital advertising exchange platforms and diverting ReactX’s customers away from ReactX to Google’s products. In other words, it is independent of the express provisions of the contract(s).

Finally, Google argues the implied covenant claim is preempted by CUTSA. The court finds, however, that ReactX seeks contractual remedies, and rejects the argument that the claims are necessarily identical to the previously rejected claim for interference with contract. (See FAC.)

Judge of the Superior Court

FN 1 - As a persuasive point, Plaintiff notes that some federal district courts have taken the position that “whether or not a breach of the implied covenant is duplicative of a contract is more appropriately addressed at summary judgment as opposed to the more liberal pleading standard applicable to the present motion to dismiss.” (Enfinity Cent. Val 2 Parlier LLC v. City of Parlier, 2020 WL 3060390, at *6 (E.D. Cal. June 9, 2020).) Of course, this is not binding on this court. But based on the facts before it now, this court is inclined to agree. As a counterpoint, Defendant rightfully notes that California courts have decided the issue at the demurrer stage. (See, e.g., Careau, 222 Cal. App. 3d at 1392; Levy v. Only Cremations for Pets, Inc. (2020) 57 Cal. App. 5th 203, 215.)